Company Perspectives:

House of Fabrics is on the right track to regain its leadership position and pursue new growth opportunities.... Now it's time to focus on the exciting challenges and opportunities that lie ahead as we concentrate on the merchandising, marketing, and operational aspects of the business, working towards an improved fall and holiday season.

Company History:

House of Fabrics, Inc. is one of the largest home sewing and craft retailers in the United States. The specialty retailer sells mid-priced fabrics, including cottons, rayons, woolens, and silks; crafts such as needlepoint kits, patterns, fringes, and fabric decorating kits; notions, particularly yarns, threads, zippers, and buttons; and sewing machines. House of Fabrics buys finished goods directly from mills and sells them in retail outlets throughout the United States. Stores west of the Rocky Mountains operate as House of Fabrics, Fabricland, or Fabric King. Stores in other parts of the United States operate under the names House of Fabrics or So-Fro Fabrics.

The Sofro Brothers Start Out

The Sofro brothers founded House of Fabrics in 1946 as a retail and fabrics business. House of Fabrics historically purchased goods from mills and manufacturers directly. Until 1996, the retailer operated a processing and warehousing facility in South Carolina. After 1996, House of Fabrics outsourced its processing and warehousing operations.

Fabric retailing proved to be a cyclical business for the brothers, with June and July as the worst months for all retailers. During the first quarter sewers made spring and Easter clothes. In the third quarter, sewers purchased material for back-to-school clothes and Halloween costumes. Fourth quarter purchases were for Christmas creations.

House of Fabrics grew steadily and became a public company in 1965. Since then, the retailer's sales increased annually until well into the 1990s.

Sewing and Societal Changes in the 1970s

Nineteen seventy-six marked the beginning of an industry shakeout. Societal changes affected fabric retailers profoundly. Traditionally, most customers of fabric retailers were women. As more women entered the workforce during the 1970s, they had less time for sewing. Retail clothing stores also began stocking less expensive imported ready-to-wear items, and specialty sizes--women's plus and petite sizes--became more commonplace. Thus, economics and availability lessened the need for women sewing clothes. Fewer and fewer women were skilled at sewing anymore. Despite these changing conditions, 70 percent of House of Fabrics' sales came from fabric for garments in 1978. Sales for the company remained strong throughout the 1970s and 1980s.

The 1980s: Performing Well in Trying Times

House of Fabrics nevertheless embarked on a total makeover through a seven-year plan in 1984. At the plan's beginning, most House of Fabrics outlets were 4,400-square-foot stores in malls. The makeover plan called for the development of 12,000-square-foot freestanding superstores. By 1988, 42 percent of all House of Fabrics outlets were superstores contributing 51 percent of the retailer's sales and 58 percent of the operating profits.

House of Fabrics reported a record year--$11.3 million in profits--in 1985. Still chaired by a member of the founders' family--Barney Sofro, son and nephew of the original Sofro brothers--in 1988, the company was the largest home sewing and craft retailer in the United States, with more than 660 stores in 43 states and $322 million in sales.

In 1988, fabric retailing was a $3.5 billion industry that experienced zero growth in 12 years. In fact, the industry actually shrank since 1976 if inflation was taken into account. Fabric retailing outlets declined throughout the United States--from 40,000 to 10,000. Even major department stores such as J. C. Penney eliminated fabric departments. Yet Barney Sofro remained optimistic for the industry. "The fabric business is very much alive and well," he told Forbes in 1988. "It's been on the scene for thousands of years, and it will be around forever."

In order to compete more effectively in this changing environment, House of Fabrics realigned its buyers. In 1986, all of the company's fabric buyers were males, except one. In 1988, though, the company selected fabric for its stores through a team of men and women. (Since most customers were women, the company felt that a team including females could better reflect customer preferences.) House of Fabrics also began in-store classes to attract more people to the dying art of sewing.

To further ensure prosperity in a changing market, House of Fabrics revised its marketing mix: 47 percent of the company's sales came from fabrics in 1988, but about 50 percent of the fabric sold was for home decoration or was related to holidays instead of material for garments. Notions accounted for 42 percent of sales, and 11 percent of sales related to craft items such as knitting supplies or needlepoint kits.

Despite the tough marketplace, House of Fabrics still performed well. In 1988, BMI Capital named the retailer one of its favorite stocks, and 1989 was another record year for the company, topping 1985's profits. House of Fabrics entered the 1990s in good standing.

The Decline Begins in 1991

By December 1991, however, House of Fabrics began a serious decline. Sales for the year increased about 25 percent, but an acquisition adversely affected House of Fabrics stock. In 1991, House of Fabrics purchased Fabricland--an 86-store chain based in Portland, Oregon--in a hostile takeover. The company's earnings after the acquisition were below expected levels, and House of Fabrics stock fell dramatically--from $41.50 per share in October 1991 to $11.63 in July 1992. Jacques Nichols, a former Fabricland board member, explained the situation to the Business Journal-Portland: " People were very excited by the acquisition of Fabricland and that was one of the reasons the stock went wild. But so far I don't think the match between the two companies has worked out as well as House of Fabrics expected. I don't think they achieved the economies of scale for which they were hoping."

In addition, ex-Fabricland employees--those who lost their jobs when the two companies consolidated operations after the acquisition--sold their Fabricland stock. With the capital from their stock sales, the ex-employees started a competing company--the warehouse-style Fabric Depot.

Administrative expenses increased for House of Fabrics at this time, too--from $89 million in early 1991 to $115.3 million in early 1992. Though the acquisition contributed to some of the costs, House of Fabrics' expenses also rose from financing its superstores and from the implementation of a new inventory tracking system. Its short-term debt increased by $31 million, and--though stock prices recovered to $14 per share in September 1992--earnings dropped from $0.40 per share to $0.16. Nonetheless, House of Fabrics sales increased from 1991 to 1992, and the company remained profitable until 1993.

A Tough Patch in 1993

In 1993, House of Fabrics was forced to close 110 underperforming mall stores in order to maintain its larger freestanding and strip center stores. In October, the company incurred $35 million in restructuring charges. In January and February 1994, House of Fabrics struggled just to pay its bills, and fiscal 1994 recorded a loss of $29.3 million for the retailer. By June 1994, House of Fabrics stock was worth a mere $4.25 per share.

The fabric industry was oversaturated with stores at this time. The economy was sluggish in 1994, and nobody was sewing clothes anymore. House of Fabrics responded by closing 200 more stores, including 120 superstores. (With fewer stores, House of Fabrics fell from the number one fabric retailer in the United States to number two behind Fabri-Centers of America.) House of Fabrics also expanded its home decorating and craft merchandise lines in 1994.

House of Fabrics' own antiquated operating methods worked against them as well. The retailer, for example, computerized some stores, but not all outlets were able to track inventory electronically. Technological advancement was not included in existing strategic plans. "They've hit a tough patch," observed Robert Simonson, senior vice president at Kemper Securities, a Chicago-based brokerage, in the Los Angeles Business Journal. As Gary L. Larkins, president and chief executive officer of House of Fabrics, revealed in HFD-The Weekly Home Furnishings Newspaper: "The company continues to encounter extremely difficult operating conditions in an overstored industry, compounded by a sluggish economy in California and the West Coast generally. Further, as we have stated previously, fabric sales for apparel have decreased due to availability of bargain-priced, ready-to-wear clothing. Clearly, this is a very difficult period for House of Fabrics, but we are taking the tough steps necessary to restructure and improve operations. We look forward to the creation of a smaller, leaner, and stronger company by the end of the fiscal year."

In November 1994, House of Fabrics nonetheless filed for reorganization under the Chapter 11 bankruptcy code, declaring $242.1 million in liabilities. Larkins explained to HFD-The Weekly Home Furnishings Newspaper: "For more than a year, the company's operating options and liquidity have been severely limited. By utilizing the Chapter 11 process, we believe we can achieve an orderly restructuring that will enable us to capitalize on opportunities resulting from improvements in operations and merchandising. While we would have preferred to complete our restructuring out of court, we now believe that it is in the best interest of all the company's constituents to complete the restructuring through a court-supervised process that fairly recognizes the interests of, among others, our vendors, other creditors, and shareholders."

Larkins worked to downsize the company, closing 270 unprofitable stores in the Midwest and eastern United States from August 1994 through April 1995. House of Fabrics remodeled eight superstores with expanded floral, home decoration, and craft departments, and the retailer introduced new merchandise, especially home and craft items. With 360 stores still in operation throughout the United States, House of Fabrics successfully secured credit from its vendors and financing from banks. These funds, plus cash from store liquidations, allowed the company to purchase inventory for remaining outlets, especially less expensive foreign products.

House of Fabrics stock was worth about $0.94 per share in 1995. Near the end of the year, Hancock Fabrics attempted an acquisition of House of Fabrics, which was aborted in December 1995.

In April 1996, House of Fabrics closed another 86 underperforming stores. The company secured a revolving line of credit for use upon emerging from bankruptcy at its restructuring. In July 1996, the courts approved House of Fabrics' third amended reorganization plan, which the company immediately implemented. By August, the retailer merged Fabricland and all other subsidiaries into House of Fabrics and began selling some properties later in the year to strengthen its balance sheet. Recovery began.

House of Fabrics entered 1997 committed to fewer stores and an aggressive markdown program. At the end of the first quarter that year, House of Fabrics reduced its net loss 27 percent. April 1997 marked the second consecutive profitable quarter for House of Fabrics. At that time, Larkins was named vice chairman of House of Fabrics, a new position for the executive that developed the company, guided it through bankruptcy, and led its turnaround. Donald L. Richey replaced Larkins as president and chief executive officer. Richey explained the turnaround in a press release: "We are realizing the benefits of initiatives that have been executed as part of the company's reorganization plan. These initiatives include the closing of a number of unprofitable and underperforming stores and reducing selling, general, and administrative expenses." Eight additional underperforming stores closed in fiscal 1997. In total, there were more than 260 company-owned stores in operation that year employing 5,000 in 27 states.

Moving Forward

Toward the middle of 1997, House of Fabrics secured a credit agreement that strengthened its cash position. The company invested in technology with information processing and new merchandise management systems. House of Fabrics installed personal computers and related equipment in all stores. By September, all but eight Fabric King stores had point-of-sale scanning equipment.

House of Fabrics vowed to concentrate on such fundamentals as merchandising, marketing, and store operations to rebuild the value of the company. The retailer strengthened its management team with the appointment of two new officers, James A. Salinas and Carolyn J. Tackett. Again on favorable terms with its vendors, House of Fabrics improved its reorder capabilities and moved from deep, storewide discounts to enhance its bottom line. According to Richey in a 1997 press release: "We continue to be encouraged by the positive trends developing in our industry and, with a firm game plan in place, we look forward to being a much stronger competitor.... I am excited about the progress we have made toward rebuilding the foundation of our company. I am convinced that the steps we are taking are right, and we will see the results as we move into our industry's most productive period this fall."